Richard Posner on "How I Became a Keynesian"

http://www.tnr.com/article/how-i-became-keynesian

by sethg • 17 years ago

12 18 17 years ago

darjen2• 17 years ago

"But for a confidence-building public-works program to be effective in arresting an economic collapse, the government must be able to finance its increased spending by means that do not reduce private spending commensurately. If it finances the program by taxation, it will be draining cash from the economy at the same time that it is injecting cash into it. But if it borrows to finance the program (deficit spending), or finances it with new money created by the Federal Reserve, the costs may be deferred until the economy is well on the way to recovery and can afford to pay them without endangering economic stability."

Doesn't new money creation have the same effect as directly taking cash from the economy? After all, it does cheapen all available money. How, then, can he say that these costs are deferred?

frig3• 17 years ago

Doesn't new money creation have the same effect as directly taking cash from the economy? After all, it does cheapen all available money. How, then, can he say that these costs are deferred?

Time-delay effect. In theory if everyone knows how much new money is being pumped into the economy (and exactly when it arrives, etc.) then the adjustment to reduced value of money happens instantly and you haven't accomplished much.

If instead the new money is injected stealthily into the economy (or at least: knowledge about it doesn't spread everywhere instantaneously) then the cost (in inflation) will be deferred (until "everyone figures it out" / prices re-adjust).

Thus in the short-term private sector spending would be mostly unaffected (b/c people have about the same nominal amounts of money as before and prices are still at about their previous nominal amounts) and over the longer term the inflationary effect kicks in and you pay for it.

In Keynes's time it would be pretty likely you could stealthily inject money and also it would be pretty likely that readjustment to the increased money supply would happen slowly; no internet, for one, and generally nowhere near as tightly integrated an economy as we have today.

That's not as clear today (information moves faster), but on the other hand information still takes time to work its way through the economy.

padmanabhan01• 17 years ago

That is what makes it even worse. Those benefiting from that would be those who get to spend the extra money first and those affected are those that save. That would defeat the whole point of money as a store of value, since it would be losing its value.

darjen2• 17 years ago

Thanks for the response. How stealthy can they really be about it, though? If it's common knowledge that this is how the government will respond, would this time-delay effect be negated? Wouldn't everyone know that dollars are being pumped, and start raising their prices to compensate? Just trying to wrap my head around this stuff...

pkulak• 17 years ago

In a recession, there's sometimes a bit of deflation, or at least much-slowed inflation, so you have some more leeway to just start pumping money into the economy (by actually printing money, or by lowering interest rates).

biohacker422• 17 years ago

Right, but deflation rewards the savers. By creating inflation in essence you are putting a gun to the heads of savers and saying spend now or lose value.

biohacker422• 17 years ago

Anyone else here remember how politics articles became ever more popular on reddit a while back?

avdempsey• 17 years ago

I remember, but I'm not gonna balk at a long form Posner post. In philosophy of law I was made to read Posner's 'Problems of Jurisprudence'; easily the most challenging read of my admittedly convenient liberal arts education. Rewarding too. But then, if Posner thinks Keynes is a challenge to read...I appreciate his summary.

viggity• 17 years ago

I think there is a difference between politics and economics. Not to say that they can't be mixed, but I think economic theory is of interest to a lot of hackers.

nazgulnarsil2• 17 years ago

the General theory rests on a faulty premise: that the failure of the markets are to provide full employment and income inequality.

both of these are features NOT bugs.

income inequality is covered by the Graham essay mind the Gap, the lack of full employment has to do with the marginal utility of labor, suffice to say full employment would represent a labor market in disequilibrium (even by Keynes' definitions).

The General Theory is crap.

roundsquare• 17 years ago

I haven't read the original book, but from what I can tell from this article, at least part of the general theory is about explaining why there is less than full employment and income inequality. As far as I can tell, you are calling the entire theory crap based the author's desire to create full employment and income equality. I'm not sure Keynes wanted governments to try for this or not, but at there seems to be at least two separate parts of the theory to evaluate.

nazgulnarsil2• 17 years ago

creating full employment or income equality would be INCREDIBLY stupid. any country that attempts to do so will be throwing money into a giant hole until they stop or go bankrupt.

http://www.paulgraham.com/gap.html http://en.wikipedia.org/wiki/Marginal_utility

cojadate• 17 years ago

"There is almost no mention of inflation in The General Theory"

Combined with the apparent lack of explanation for bubbles, doesn't that meant there is a gigantic gaping hole in the entire theory?

I don't quite see why The General Theory was enough to convert Posner to Keynesianism.

Richard Posner on "How I Became a Keynesian"

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